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append1310.html
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<html>
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<head>
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<title>10 Would laissez-faire capitalism be stable?
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</title>
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</head>
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<h1>10 Would laissez-faire capitalism be stable?</h1>
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9
Unsurprisingly, right-libertarians combine their support for "absolute
10
property rights" with a whole-hearted support for laissez-faire capitalism.
11
In such a system (which they maintain, to quote Ayn Rand, is an <i>"unknown
12
ideal"</i>) everything would be private property and there would be few (if
13
any) restrictions on "voluntary exchanges." "Anarcho"-capitalists are
14
the most extreme of defenders of pure capitalism, urging that the state
15
itself be privatised and no voluntary exchange made illegal (for example,
16
children would be considered the property of their parents and it would
17
be morally right to turn them into child prostitutes -- the child has
18
the option of leaving home if they object).
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<p>
20
As there have been no example of "pure" capitalism it is difficult to
21
say whether their claims about are true (for a discussion of a close
22
approximation see the section <a href="append1310.html#secf103">10.3</a>). This section of the FAQ is an
23
attempt to discover whether such a system would be stable or whether
24
it would be subject to the usual booms and slumps. Before starting we
25
should note that there is some disagreement within the right-libertarian
26
camp itself on this subject (although instead of stability they usually
27
refer to "equilibrium" -- which is an economics term meaning that all
28
of a societies resources are fully utilised).
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<p>
30
In general terms, most right-Libertarians' reject the concept of
31
equilibrium as such and instead stress that the economy is inherently
32
a dynamic (this is a key aspect of the Austrian school of economics).
33
Such a position is correct, of course, as such noted socialists as
34
Karl Marx and Michal Kalecki and capitalist economists as Keynes
35
recognised long ago. There seems to be two main schools of thought
36
on the nature of disequilibrium. One, inspired by von Mises, maintains
37
that the actions of the entrepreneur/capitalist results in the market
38
co-ordinating supply and demand and another, inspired by Joseph Schumpeter,
39
who question whether markets co-ordinate because entrepreneurs are
40
constantly innovating and creating new markets, products and techniques.
41
<p>
42
Of course both actions happen and we suspect that the differences in
43
the two approaches are not important. The important thing to remember
44
is that "anarcho"-capitalists and right-libertarians in general reject
45
the notion of equilibrium -- but when discussing their utopia they
46
do not actually indicate this! For example, most "anarcho"-capitalists
47
will maintain that the existence of government (and/or unions) causes
48
unemployment by either stopping capitalists investing in new lines
49
of industry or forcing up the price of labour above its market clearing
50
level (by, perhaps, restricting immigration, minimum wages, taxing
51
profits). Thus, we are assured, the worker will be better off in
52
"pure" capitalism because of the unprecedented demand for labour
53
it will create. However, full employment of labour is an equilibrium
54
in economic terms and that, remember, is impossible due to the
55
dynamic nature of the system. When pressed, they will usually admit
56
there will be periods of unemployment as the market adjusts or that
57
full unemployment actually means under a certain percentage of
58
unemployment. Thus, if you (rightly) reject the notion of equilibrium
59
you also reject the idea of full employment and so the labour market
60
becomes a buyers market and labour is at a massive disadvantage.
61
<p>
62
The right-libertarian case is based upon logical deduction, and the
63
premises required to show that laissez-faire will be stable are somewhat
64
incredible. If banks do not set the wrong interest rate, if companies
65
do not extend too much trade credit, if workers are willing to accept
66
(real wage related) pay cuts, if workers altruistically do not abuse their
67
market power in a fully employed society, if interest rates provide
68
the correct information, if capitalists predict the future relatively
69
well, if banks and companies do not suffer from isolation paradoxes,
70
then, perhaps, laissez-faire will be stable.
71
<p>
72
So, will laissez-faire capitalism be stable? Let us see by analysing
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the assumptions of right-libertarianism -- namely that there will be
74
full employment and that a system of private banks will stop the
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business cycle. We will start on the banking system first (in section
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<a href="append1310.html#secf101">10.1</a>) followed by the effects of the labour market on economic stability
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(in section <a href="append1310.html#secf102">10.2</a>). Then we will indicate, using the example of 19th
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century America, that actually existing ("impure") laissez-faire was
79
very unstable.
80
<p>
81
Explaining booms and busts by state action plays an ideological convenience
82
as it exonerates market processes as the source of instability within
83
capitalism. We hope to indicate in the next two sections why the business
84
cycle is inherent in the system (see also sections <a href="secC7.html">C.7</a>, <a href="secC8.html">C.8</a> and <a href="secC9.html">C.9</a>).
85
86
<a name="secf101"><h2>10.1 Would privatising banking make capitalism stable?</h2>
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It is claimed that the existence of the state (or, for minimal statists,
89
government policy) is the cause of the business cycle (recurring economic
90
booms and slumps). This is because the government either sets interest
91
rates too low or expands the money supply (usually by easing credit
92
restrictions and lending rates, sometimes by just printing fiat money).
93
This artificially increases investment as capitalists take advantage of
94
the artificially low interest rates. The real balance between savings and
95
investment is broken, leading to over-investment, a drop in the
96
rate of profit and so a slump (which is quite socialist in a way, as
97
many socialists also see over-investment as the key to understanding
98
the business cycle, although they obviously attribute the slump to
99
different causes -- namely the nature of capitalist production, not
100
that the credit system does not play its part -- see section
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<a href="secC7.html">C.7</a>).
102
<p>
103
In the words of Austrian Economist W. Duncan Reekie, <i>"[t]he business
104
cycle is generated by monetary expansion and contraction . . . When
105
new money is printed it appears as if the supply of savings has
106
increased. Interest rates fall and businessmen are misled into
107
borrowing additional founds to finance extra investment activity . . .
108
This would be of no consequence if it had been the outcome of [genuine
109
saving] . . . -but the change was government induced. The new money
110
reaches factor owners in the form of wages, rent and interest . . .
111
the factor owners will then spend the higher money incomes in their
112
existing consumption:investment proportions . . . Capital goods
113
industries will find their expansion has been in error and malinvestments
114
have been inoccured."</i> [<b>Markets, Entrepreneurs and Liberty</b>, pp. 68-9]
115
<p>
116
In other words, there has been <i>"wasteful mis-investment due to government
117
interference with the market."</i> [<b>Op. Cit.</b>, p. 69] In response to this
118
(negative) influence in the workings of the market, it is suggested
119
by right-libertarians that a system of private banks should be used and
120
that interest rates are set by them, via market forces. In this way an
121
interest rate that matches the demand and supply for savings will
122
be reached and the business cycle will be no more. By truly privatising
123
the credit market, it is hoped by the business cycle will finally stop.
124
<p>
125
Unsurprisingly, this particular argument has its weak points and in this
126
section of the FAQ we will try to show exactly why this theory is wrong.
127
<p>
128
Let us start with Reckie's starting point. He states that the <i>"main problem"</i>
129
of the slump is <i>"why is there suddenly a '<b>cluster</b>' of business errors?
130
Businessmen and entrepreneurs are market experts (otherwise they would
131
not survive) and why should they all make mistakes simultaneously?"</i>
132
[<b>Op. Cit.</b>, p. 68] It is this <i>"cluster"</i> of mistakes that the Austrians'
133
take as evidence that the business cycle comes from outside the workings
134
of the market (i.e. is exogenous in nature). Reekie argues that an <i>"error
135
cluster only occurs when all entrepreneurs have received the wrong signals
136
on potential profitability, and all have received the signals simultaneously
137
through government interference with the money supply."</i> [<b>Op. Cit.</b>, p. 74]
138
But is this <b>really</b> the case?
139
<p>
140
The simple fact is that groups of (rational) individuals can act in the
141
same way based on the same information and this can lead to a collective
142
problem. For example, we do not consider it irrational that everyone in a
143
building leaves it when the fire alarm goes off and that the flow of
144
people can cause hold-ups at exits. Neither do we think that its unusual
145
that traffic jams occur, after all those involved are all trying to get
146
to work (i.e. they are reacting to the same desire). Now, is it so
147
strange to think that capitalists who all see the same opportunity for
148
profit in a specific market decide to invest in it? Or that the aggregate
149
outcome of these individually rational decisions may be irrational (i.e.
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cause a glut in the market)?
151
<p>
152
In other words, a "cluster" of business failures may come about because
153
a group of capitalists, acting in isolation, over-invest in a given
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market. They react to the same information (namely super profits in
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market X), arrange loans, invest and produce commodities to meet demand
156
in that market. However, the aggregate result of these individually
157
rational actions is that the aggregate supply far exceeds demand, causing
158
a slump in that market and, perhaps, business failures. The slump in this
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market (and the potential failure of some firms) has an impact on the
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companies that supplied them, the companies that are dependent on
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their employees wages/demand, the banks that supplied the credit and so
162
forth. The accumulative impact of this slump (or failures) on the chain of
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financial commitments of which they are but one link can be large and,
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perhaps, push an economy into general depression. Thus the claim that
165
it is something external to the system that causes depression is flawed.
166
<p>
167
It could be claimed the interest rate is the problem, that it does
168
not accurately reflect the demand for investment or relate it to the
169
supply of savings. But, as we argued in section <a href="secC8.html">C.8</a>, it is not at all
170
clear that the interest rate provides the necessary information to
171
capitalists. They need investment information for their specific
172
industry, but the interest rate is cross-industry. Thus capitalists in
173
market X do not know if the investment in market X is increasing and
174
so this lack of information can easily cause "mal-investment" as
175
over-investment (and so over-production) occurs. As they have no way
176
of knowing what the investment decisions of their competitors are
177
or now these decisions will affect an already unknown future, capitalists
178
may over-invest in certain markets and the net effects of this aggregate
179
mistake can expand throughout the whole economy and cause a general slump.
180
In other words, a cluster of business failures can be accounted for by
181
the workings of the market itself and <b>not</b> the (existence of) government.
182
<p>
183
This is <b>one</b> possible reason for an internally generated business cycle
184
but that is not the only one. Another is the role of class struggle which
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we discuss in the <a href="append1310.html#secf102">next section</a> and yet another is the endogenous nature
186
of the money supply itself. This account of money (proposed strongly by,
187
among others, the post-Keynesian school) argues that the money supply
188
is a function of the demand for credit, which itself is a function of the
189
level of economic activity. In other words, the banking system creates
190
as much money as people need and any attempt to control that creation
191
will cause economic problems and, perhaps, crisis (interestingly, this
192
analysis has strong parallels with mutualist and individualist anarchist
193
theories on the causes of capitalist exploitation and the business
194
cycle). Money, in other words, emerges from <b>within</b> the system and
195
so the right-libertarian attempt to "blame the state" is simply wrong.
196
<p>
197
Thus what is termed "credit money" (created by banks) is an essential
198
part of capitalism and would exist without a system of central banks.
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This is because money is created from within the system, in response
200
to the needs of capitalists. In a word, money is endogenous and credit
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money an essential part of capitalism.
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<p>
203
Right-libertarians do not agree. Reekie argues that <i>"[o]nce fractional
204
reserve banking is introduced, however, the supply of money substitutes
205
will include fiduciary media. The ingenuity of bankers, other financial
206
intermediaries and the endorsement and <b>guaranteeing of their activities
207
by governments and central banks</b> has ensured that the quantity of fiat
208
money is immense."</i> [<b>Op. Cit.</b>, p. 73]
209
<p>
210
Therefore, what "anarcho"-capitalists and other right-libertarians seem
211
to be actually complaining about when they argue that "state action" creates
212
the business cycle by creating excess money is that the state <b>allows</b>
213
bankers to meet the demand for credit by creating it. This makes sense,
214
for the first fallacy of this sort of claim is how could the state <b>force</b>
215
bankers to expand credit by loaning more money than they have savings.
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And this seems to be the normal case within capitalism -- the central
217
banks accommodate bankers activity, they do not force them to do it. Alan
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Holmes, a senior vice president at the New York Federal Reserve, stated
219
that:
220
<p><blockquote>
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<i>"In the real world, banks extend credit, creating deposits in the
222
process, and look for the reserves later. The question then becomes
223
one of whether and how the Federal Reserve will accommodate the demand
224
for reserves. In the very short run, the Federal Reserve has little or
225
no choice about accommodating that demand, over time, its influence
226
can obviously be felt."</i> [quoted by Doug Henwood, <b>Wall Street</b>, p. 220]
227
<p></blockquote>
228
(Although we must stress that central banks are <b>not</b> passive and do have
229
many tools for affecting the supply of money. For example, central banks
230
can operate "tight" money policies which can have significant impact on
231
an economy and, via creating high enough interest rates, the demand for
232
money.)
233
<p>
234
It could be argued that because central banks exist, the state
235
creates an "environment" which bankers take advantage off. By not
236
being subject to "free market" pressures, bankers could be tempted to
237
make more loans than they would otherwise in a "pure" capitalist system
238
(i.e. create credit money). The question arises, would "pure" capitalism
239
generate sufficient market controls to stop banks loaning in excess of
240
available savings (i.e. eliminate the creation of credit money/fiduciary
241
media).
242
<p>
243
It is to this question we now turn.
244
<p>
245
As noted above, the demand for credit is generated from <b>within</b> the system
246
and the comments by Holmes reinforce this. Capitalists seek credit in order
247
to make money and banks create it precisely because they are also seeking
248
profit. What right-libertarians actually object to is the government (via
249
the central bank) <b>accommodating</b> this creation of credit. If only the
250
banks could be forced to maintain a savings to loans ration of one, then
251
the business cycle would stop. But is this likely? Could market forces
252
ensure that bankers pursue such a policy? We think not -- simply because
253
the banks are profit making institutions. As post-Keynesianist Hyman Minsky
254
argues, <i>"[b]ecause bankers live in the same expectational climate as
255
businessmen, profit-seeking bankers will find ways of accommodating their
256
customers. . . Banks and bankers are not passive managers of money to
257
lend or to invest; they are in business to maximise profits. . ."</i> [quoted
258
by L. Randall Wray, <b>Money and Credit in Capitalist Economies</b>, p. 85]
259
<p>
260
This is recognised by Reekie, in passing at least (he notes that <i>"fiduciary
261
media could still exist if bankers offered them and clients accepted them"</i>
262
[<b>Op. Cit.</b>, p. 73]). Bankers will tend to try and accommodate their customers
263
and earn as much money as possible. Thus Charles P. Kindleberger comments
264
that monetary expansion <i>"is systematic and endogenous rather than random
265
and exogenous"</i> seem to fit far better the reality of capitalism that the
266
Austrian and right-libertarian viewpoint [<b>Manias, Panics, and Crashes</b>,
267
p. 59] and post-Keynesian L. Randall Wray argues that <i>"the money supply
268
. . . is more obviously endogenous in the monetary systems which predate
269
the development of a central bank."</i> [<b>Op. Cit.</b>, p. 150]
270
<p>
271
In other words, the money supply cannot be directly controlled by the
272
central bank since it is determined by private decisions to enter into
273
debt commitments to finance spending. Given that money is generated
274
from <b>within</b> the system, can market forces ensure the non-expansion
275
of credit (i.e. that the demand for loans equals the supply of savings)?
276
To begin to answer this question we must note that investment is
277
<i>"essentially determined by expected profitability."</i> [Philip Arestis,
278
<b>The Post-Keynesian Approach to Economics</b>, p. 103] This means that
279
the actions of the banks cannot be taken in isolation from the rest
280
of the economy. Money, credit and banks are an essential part of
281
the capitalist system and they cannot be artificially isolated from
282
the expectations, pressures and influences of that system.
283
<p>
284
Let us assume that the banks desire to maintain a loans to savings ratio
285
of one and try to adjust their interest rates accordingly. Firstly,
286
changes in the rate of interest <i>"produce only a very small, if any,
287
movement in business investment"</i> according to empirical evidence
288
[<b>Op. Cit.</b>, pp. 82-83] and that <i>"the demand for credit is extremely
289
inelastic with respect to interest rates."</i> [L. Randall Wray, <b>Op. Cit.</b>,
290
p. 245] Thus, to keep the supply of savings in line with the demand
291
for loans, interest rates would have to increase greatly (indeed,
292
trying to control the money supply by controlling the monetary bases
293
in this way will only lead to very big fluctuations in interest rates).
294
And increasing interest rates has a couple of paradoxical effects.
295
<p>
296
According to economists Joseph Stiglitz and Andrew Weiss (in <i>"Credit
297
Rationing in Markets with Imperfect Knowledge"</i>, <b>American Economic Review</b>,
298
no. 71, pp. 393-410) interest rates are subject to what is called the
299
<i>"lemons problem"</i> (asymmetrical information between buyer and seller). Stiglitz
300
and Weiss applied the "lemons problem" to the credit market and argued
301
(and unknowingly repeated Adam Smith) that at a given interest rate, lenders
302
will earn lower return by lending to bad borrowers (because of defaults)
303
than to good ones. If lenders try to increase interest rates to compensate
304
for this risk, they may chase away good borrowers, who are unwilling to
305
pay a higher rate, while perversely not chasing away incompetent, criminal,
306
or malignantly optimistic borrowers. This means that an increase in interest
307
rates may actually increase the possibilities of crisis, as more loans may
308
end up in the hands of defaulters.
309
<p>
310
This gives banks a strong incentive to keep interest rates lower than
311
they otherwise could be. Moreover, <i>"increases in interest rates make
312
it more difficult for economic agents to meet their debt repayments"</i>
313
[Philip Arestis, <b>Op. Cit.</b>, pp. 237-8] which means when interest rates
314
<b>are</b> raised, defaults will increase and place pressures on the banking
315
system. At high enough short-term interest rates, firms find it hard to
316
pay their interest bills, which cause/increase cash flow problems and
317
so <i>"[s]harp increases in short term interest rates . . .leads to a fall
318
in the present value of gross profits after taxes (quasi-rents) that
319
capital assets are expected to earn."</i> [Hyman Minsky, <b>Post-Keynesian
320
Economic Theory</b>, p. 45]
321
<p>
322
In addition, <i>"production of most investment goods is undertaken on order
323
and requires time for completion. A rise in interest rates is not
324
likely to cause firms to abandon projects in the process of production
325
. . . This does not mean . . . that investment is completely unresponsive
326
to interest rates. A large increase in interest rates causes a 'present
327
value reversal', forcing the marginal efficiency of capital to fall
328
below the interest rate. If the long term interest rate is also
329
pushed above the marginal efficiency of capital, the project may be
330
abandoned."</i> [Wray, <b>Op. Cit.</b>, pp. 172-3] In other words, investment
331
takes <b>time</b> and there is a lag between investment decisions and actual
332
fixed capital investment. So if interest rates vary during this lag
333
period, initially profitable investments may become white elephants.
334
<p>
335
As Michal Kalecki argued, the rate of interest must be lower than the
336
rate of profit otherwise investment becomes pointless. The incentive for
337
a firm to own and operate capital is dependent on the prospective rate
338
of profit on that capital relative to the rate of interest at which the
339
firm can borrow at. The higher the interest rate, the less promising
340
investment becomes.
341
<p>
342
If investment is unresponsive to all but very high interest rates (as
343
we indicated above), then a privatised banking system will be under intense
344
pressure to keep rates low enough to maintain a boom (by, perhaps, creating
345
credit above the amount available as savings). And if it does this,
346
over-investment and crisis is the eventual outcome. If it does not do
347
this and increases interest rates then consumption and investment will
348
dry up as interest rates rise and the defaulters (honest and dishonest)
349
increase and a crisis will eventually occur.
350
<p>
351
This is because increasing interest rates may increase savings <b>but</b>
352
it also reduce consumption (<i>"high interest rates also deter both consumers
353
and companies from spending, so that the domestic economy is weakened
354
and unemployment rises"</i> [Paul Ormerod, <b>The Death of Economics</b>, p. 70]).
355
This means that firms can face a drop off in demand, causing them problems
356
and (perhaps) leading to a lack of profits, debt repayment problems and
357
failure. An increase in interest rates also reduces demand for investment
358
goods, which also can cause firms problems, increase unemployment and
359
so on. So an increase in interest rates (particularly a sharp rise) could
360
reduce consumption and investment (i.e. reduce aggregate demand) and have
361
a ripple effect throughout the economy which could cause a slump to occur.
362
<p>
363
In other words, interest rates and the supply and demand of savings/loans
364
they are meant to reflect may not necessarily move an economy towards
365
equilibrium (if such a concept is useful). Indeed, the workings of a
366
"pure" banking system without credit money may increase unemployment
367
as demand falls in both investment and consumption in response to
368
high interest rates and a general shortage of money due to lack of
369
(credit) money resulting from the "tight" money regime implied by
370
such a regime (i.e. the business cycle would still exist). This was
371
the case of the failed Monetarist experiments on the early 1980s when
372
central banks in America and Britain tried to pursue a "tight" money
373
policy. The "tight" money policy did not, in fact, control the money
374
supply. All it did do was increase interest rates and lead to a serious
375
financial crisis and a deep recession (as Wray notes, <i>"the central
376
bank uses tight money polices to raise interest rates"</i> [<b>Op. Cit.</b>,
377
p. 262]). This recession, we must note, also broke the backbone of
378
working class resistance and the unions in both countries due to the
379
high levels of unemployment it generated. As intended, we are sure.
380
<p>
381
Such an outcome would not surprise anarchists, as this was a key feature
382
of the Individualist and Mutualist Anarchists' arguments against the
383
"money monopoly" associated with specie money. They argued that
384
the "money monopoly" created a "tight" money regime which reduced
385
the demand for labour by restricting money and credit and so
386
allowed the exploitation of labour (i.e. encouraged wage labour)
387
and stopped the development of non-capitalist forms of production.
388
Thus Lysander Spooner's comments that workers need <i>"<b>money capital</b>
389
to enable them to buy the raw materials upon which to bestow their
390
labour, the implements and machinery with which to labour . . . Unless
391
they get this capital, they must all either work at a disadvantage,
392
or not work at all. A very large portion of them, to save themselves
393
from starvation, have no alternative but to sell their labour to
394
others . . ."</i> [<b>A Letter to Grover Cleveland</b>, p. 39] It is interesting
395
to note that workers <b>did</b> do well during the 1950s and 1960s under
396
a "liberal" money regime than they did under the "tighter" regimes of
397
the 1980s and 1990s.
398
<p>
399
We should also note that an extended period of boom will encourage banks
400
to make loans more freely. According to Minsky's <i>"financial instability
401
model"</i> crisis (see <i>"The Financial Instability Hypothesis"</i> in <b>Post-Keynesian
402
Economic Theory</b> for example) is essentially caused by risky financial
403
practices during periods of financial tranquillity. In other words,
404
<i>"stability is destabilising."</i> In a period of boom, banks are happy and
405
the increased profits from companies are flowing into their vaults.
406
Over time, bankers note that they can use a reserve system to increase
407
their income and, due to the general upward swing of the economy,
408
consider it safe to do so (and given that they are in competition
409
with other banks, they may provide loans simply because they are
410
afraid of losing customers to more flexible competitors). This
411
increases the instability within the system (as firms increase
412
their debts due to the flexibility of the banks) and produces the
413
possibility of crisis if interest rates are increased (because
414
the ability of business to fulfil their financial commitments
415
embedded in debts deteriorates).
416
<p>
417
Even if we assume that interest rates <b>do</b> work as predicted in
418
theory, it is false to maintain that there is one interest rate. This
419
is not the case. <i>"Concentration of capital leads to unequal access to
420
investment funds, which obstructs further the possibility of smooth
421
transitions in industrial activity. Because of their past record of
422
profitability, large enterprises have higher credit ratings and easier
423
access to credit facilities, and they are able to put up larger collateral
424
for a loan."</i> [Michael A. Bernstein, <b>The Great Depression</b>, p. 106] As
425
we noted in section <a href="secC5.html#secc51">C.5.1</a>, the larger the firm, the lower the interest
426
rate they have to pay. Thus banks routinely lower their interest rates
427
to their best clients even though the future is uncertain and past
428
performance cannot and does not indicate future returns. Therefore
429
it seems a bit strange to maintain that the interest rate will bring
430
savings and loans into line if there are different rates being offered.
431
<p>
432
And, of course, private banks cannot affect the underlying fundamentals
433
that drive the economy -- like productivity, working class power and
434
political stability -- any more than central banks (although central
435
banks can influence the speed and gentleness of adjustment to a crisis).
436
<p>
437
Indeed, given a period of full employment a system of private banks may
438
actually speed up the coming of a slump. As we argue in the <a href="append1310.html#secf101">next section</a>,
439
full employment results in a profits squeeze as firms face a tight labour
440
market (which drives up costs) and, therefore, increased workers' power
441
at the point of production and in their power of exit. In a central bank
442
system, capitalists can pass on these increasing costs to consumers and
443
so maintain their profit margins for longer. This option is restricted
444
in a private banking system as banks would be less inclined to devalue
445
their money. This means that firms will face a profits squeeze sooner
446
rather than later, which will cause a slump as firms cannot make ends
447
meet. As Reekie notes, inflation <i>"can temporarily reduce employment
448
by postponing the time when misdirected labour will be laid off"</i> but
449
as Austrian's (like Monetarists) think <i>"inflation is a monetary
450
phenomenon"</i> he does not understand the real causes of inflation
451
and what they imply for a "pure" capitalist system [<b>Op. Cit.</b>, p. 67,
452
p. 74]. As Paul Ormerod points out <i>"the claim that inflation is always
453
and everywhere purely caused by increases in the money supply, and
454
that there the rate of inflation bears a stable, predictable relationship
455
to increases in the money supply is ridiculous."</i> And he notes that
456
<i>"[i]ncreases in the rate of inflation tend to be linked to falls in
457
unemployment, and vice versa"</i> which indicates its <b>real</b> causes --
458
namely in the balance of class power and in the class struggle.
459
[<b>The Death of Economics</b>, p. 96, p. 131]
460
<p>
461
Moreover, if we do take the Austrian theory of the business cycle at
462
face value we are drawn to conclusion that in order to finance investment
463
savings must be increased. But to maintain or increase the stock of
464
loanable savings, inequality must be increased. This is because,
465
unsurprisingly, rich people save a larger proportion of their income
466
than poor people and the proportion of profits saved are higher than
467
the proportion of wages. But increasing inequality (as we argued in
468
section <a href="append133.html#secf31">3.1</a>) makes a mockery of right-libertarian claims that their
469
system is based on freedom or justice.
470
<p>
471
This means that the preferred banking system of "anarcho"-capitalism
472
implies increasing, not decreasing, inequality within society. Moreover,
473
most firms (as we indicated in section <a href="secC5.html#secc51">C.5.1</a>) fund their investments
474
with their own savings which would make it hard for banks to loan
475
these savings out as they could be withdrawn at any time. This could
476
have serious implications for the economy, as banks refuse to fund
477
new investment simply because of the uncertainty they face when
478
accessing if their available savings can be loaned to others (after all,
479
they can hardly loan out the savings of a customer who is likely to
480
demand them at any time). And by refusing to fund new investment, a
481
boom could falter and turn to slump as firms do not find the necessary
482
orders to keep going.
483
<p>
484
So, would market forces create "sound banking"? The answer is probably
485
not. The pressures on banks to make profits come into conflict with
486
the need to maintain their savings to loans ration (and so the
487
confidence of their customers). As Wray argues, <i>"as banks are profit
488
seeking firms, they find ways to increase their liabilities which
489
don't entail increases in reserve requirements"</i> and <i>"[i]f banks share
490
the profit expectations of prospective borrowers, they can create
491
credit to allow [projects/investments] to proceed."</i> [<b>Op. Cit.</b>, p. 295,
492
p. 283] This can be seen from the historical record. As Kindleberger
493
notes, <i>"the market will create new forms of money in periods of
494
boom to get around the limit"</i> imposed on the money supply [<b>Op. Cit.</b>,
495
p. 63]. Trade credit is one way, for example. Under the Monetarist
496
experiments of 1980s, there was <i>"deregulation and central bank
497
constraints raised interest rates and created a moral hazard --
498
banks made increasingly risky loans to cover rising costs of issuing
499
liabilities. Rising competition from nonbanks and tight money
500
policy forced banks to lower standards and increase rates of growth
501
in an attempt to 'grow their way to profitability'"</i> [<b>Op. Cit.</b>, p. 293]
502
<p>
503
Thus credit money ("fiduciary media") is an attempt to overcome the
504
scarcity of money within capitalism, particularly the scarcity of
505
specie money. The pressures that banks face within "actually
506
existing" capitalism would still be faced under "pure" capitalism.
507
It is likely (as Reekie acknowledges) that credit money would still
508
be created in response to the demands of business people (although
509
not at the same level as is currently the case, we imagine). The
510
banks, seeking profits themselves and in competition for customers,
511
would be caught between maintaining the value of their business
512
(i.e. their money) and the needs to maximise profits. As a boom
513
develops, banks would be tempted to introduce credit money to
514
maintain it as increasing the interest rate would be difficult
515
and potentially dangerous (for reasons we noted above). Thus, if
516
credit money is not forth coming (i.e. the banks stick to the
517
Austrian claims that loans must equal savings) then the rise in
518
interest rates required will generate a slump. If it is forthcoming,
519
then the danger of over-investment becomes increasingly likely.
520
All in all, the business cycle is part of capitalism and <b>not</b>
521
caused by "external" factors like the existence of government.
522
<p>
523
As Reekie notes, to Austrians <i>"ignorance of the future is endemic"</i>
524
[<b>Op. Cit.</b>, p. 117] but you would be forgiven for thinking that this
525
is not the case when it comes to investment. An individual firm
526
cannot know whether its investment project will generate the stream
527
of returns necessary to meet the stream of payment commitments
528
undertaken to finance the project. And neither can the banks who
529
fund those projects. Even <b>if</b> a bank does not get tempted into
530
providing credit money in excess of savings, it cannot predict
531
whether other banks will do the same or whether the projects it
532
funds will be successful. Firms, looking for credit, may turn to
533
more flexible competitors (who practice reserve banking to some
534
degree) and the inflexible bank may see its market share and
535
profits decrease. After all, commercial banks <i>"typically establish
536
relations with customers to reduce the uncertainty involved in
537
making loans. Once a bank has entered into a relationship with
538
a customer, it has strong incentives to meet the demands of
539
that customer."</i> [Wray, <b>Op. Cit.</b>, p. 85]
540
<p>
541
There are example of fully privatised banks. For example, in the
542
United States (<i>"which was without a central bank after 1837"</i>) <i>"the
543
major banks in New York were in a bind between their roles as
544
profit seekers, which made them contributors to the instability
545
of credit, and as possessors of country deposits against whose
546
instability they had to guard."</i> [Kindleberger, <b>Op. Cit.</b>, p. 85]
547
<p>
548
In Scotland, the banks were unregulated between 1772 and 1845
549
but <i>"the leading commercial banks accumulated the notes of lessor
550
ones, as the Second Bank of the United States did contemporaneously
551
in [the USA], ready to convert them to specie if they thought
552
they were getting out of line. They served, that is, as an
553
informal controller of the money supply. For the rest, as so
554
often, historical evidence runs against strong theory, as
555
demonstrated by the country banks in England from 1745 to 1835,
556
wildcat banking in Michigan in the 1830s, and the latest
557
experience with bank deregulation in Latin America."</i> [<b>Op. Cit.</b>,
558
p. 82] And we should note there were a few banking "wars" during
559
the period of deregulation in Scotland which forced a few of the
560
smaller banks to fail as the bigger ones refused their money
561
and that there was a major bank failure in the Ayr Bank.
562
<p>
563
Kendleberger argues that central banking <i>"arose to impose control
564
on the instability of credit"</i> and did not cause the instability
565
which right-libertarians maintain it does. And as we note in
566
section <a href="append1310.html#secf103">10.3</a>, the USA suffered massive economic instability
567
during its period without central banking. Thus, <b>if</b> credit
568
money <b>is</b> the cause of the business cycle, it is likely that
569
a "pure" capitalism will still suffer from it just as much as
570
"actually existing" capitalism (either due to high interest rates
571
or over-investment).
572
<p>
573
In general, as the failed Monetarist experiments of the 1980s prove,
574
trying to control the money supply is impossible. The demand for money
575
is dependent on the needs of the economy and any attempt to control
576
it will fail (and cause a deep depression, usually via high interest
577
rates). The business cycle, therefore, is an endogenous phenomenon caused
578
by the normal functioning of the capitalist economic system. Austrian
579
and right-libertarian claims that <i>"slump flows boom, but for a totally
580
unnecessary reason: government inspired mal-investment"</i> [Reekie, <b>Op.
581
Cit.</b>, p. 74] are simply wrong. Over-investment <b>does</b> occur, but it
582
is <b>not</b> <i>"inspired"</i> by the government. It is <i>"inspired"</i> by the banks
583
need to make profits from loans and from businesses need for investment
584
funds which the banks accommodate. In other words, by the nature of
585
the capitalist system.
586
587
<a name="secf102"><h2>10.2 How does the labour market effect capitalism?</h2>
588
589
In many ways, the labour market is the one that affects capitalism the
590
most. The right-libertarian assumption (like that of mainstream economics)
591
is that markets clear and, therefore, the labour market will also clear.
592
As this assumption has rarely been proven to be true in actuality (i.e.
593
periods of full employment within capitalism are few and far between),
594
this leaves its supporters with a problem -- reality contradicts the
595
theory.
596
<p>
597
The theory predicts full employment but reality shows that this is not
598
the case. Since we are dealing with logical deductions from assumptions,
599
obviously the theory cannot be wrong and so we must identify external
600
factors which cause the business cycle (and so unemployment). In this
601
way attention is diverted away from the market and its workings --
602
after all, it is assumed that the capitalist market works -- and onto
603
something else. This "something else" has been quite a few different
604
things (most ridiculously, sun spots in the case of one of the founders of
605
marginalist economics, William Stanley Jevons). However, these days most
606
pro-free market capitalist economists and right-libertarians have now
607
decided it is the state.
608
<p>
609
In this section of the FAQ we will present a case that maintains that
610
the assumption that markets clear is false at least for one, unique,
611
market -- namely, the market for labour. As the fundamental assumption
612
underlying "free market" capitalism is false, the logically consistent
613
superstructure built upon comes crashing down. Part of the reason why
614
capitalism is unstable is due to the commodification of labour (i.e.
615
people) and the problems this creates. The state itself can have
616
positive and negative impacts on the economy, but removing it or
617
its influence will not solve the business cycle.
618
<p>
619
Why is this? Simply due to the nature of the labour market.
620
<p>
621
Anarchists have long realised that the capitalist market is based upon
622
inequalities and changes in power. Proudhon argued that <i>"[t]he manufacturer
623
says to the labourer, 'You are as free to go elsewhere with your services
624
as I am to receive them. I offer you so much.' The merchant says to the
625
customer, 'Take it or leave it; you are master of your money, as I am
626
of my goods. I want so much.' Who will yield? The weaker."</i> He, like all
627
anarchists, saw that domination, oppression and exploitation flow from
628
inequalities of market/economic power and that the <i>"power of invasion
629
lies in superior strength."</i> [<b>What is Property?</b>, p. 216, p. 215]
630
<p>
631
This applies with greatest force to the labour market. While mainstream
632
economics and right-libertarian variations of it refuse to acknowledge
633
that the capitalist market is a based upon hierarchy and power, anarchists
634
(and other socialists) do not share this opinion. And because they do
635
not share this understanding with anarchists, right-libertarians will
636
never be able to understand capitalism or its dynamics and development.
637
Thus, when it comes to the labour market, it is essential to remember
638
that the balance of power within it is the key to understanding the
639
business cycle. Thus the economy must be understood as a system of
640
power.
641
<p>
642
So how does the labour market effect capitalism? Let us consider a
643
growing economy, on that is coming out of a recession. Such a growing
644
economy stimulates demand for employment and as unemployment falls, the
645
costs of finding workers increase and wage and condition demands of
646
existing workers intensify. As the economy is growing and labour is
647
scare, the threat associated with the hardship of unemployment is
648
weakened. The share of profits is squeezed and in reaction to this
649
companies begin to cut costs (by reducing inventories, postponing
650
investment plans and laying off workers). As a result, the economy
651
moves into a downturn. Unemployment rises and wage demands are moderated.
652
Eventually, this enables the share of profits first of all to stabilise,
653
and then rise. Such an <i>"interplay between profits and unemployment as
654
the key determinant of business cycles"</i> is <i>"observed in the empirical
655
data."</i> [Paul Ormerod, <b>The Death of Economics</b>, p. 188]
656
<p>
657
Thus, as an economy approaches full employment the balance of power on
658
the labour market changes. The sack is no longer that great a threat
659
as people see that they can get a job elsewhere easily. Thus wages
660
and working conditions increase as companies try to get new (and
661
keep) existing employees and output is harder to maintain. In the
662
words of economist William Lazonick, labour <i>"that is able to command
663
a higher price than previously because of the appearance of tighter
664
labour markets is, by definition, labour that is highly mobile via
665
the market. And labour that is highly mobile via the market is labour
666
whose supply of effort is difficult for managers to control in the
667
production process. Hence, the advent of tight labour markets generally
668
results in more rapidly rising average costs . . .as well as upward
669
shifts in the average cost curve. . ."</i> [<b>Business Organisation and
670
the Myth of the Market Economy</b>, p. 106]
671
<p>
672
In other words, under conditions of full-employment <i>"employers are
673
in danger of losing the upper hand."</i> [Juliet B. Schor, <b>The Overworked
674
American</b>, p. 75] Schor argues that <i>"employers have a structural advantage
675
in the labour market, because there are typically more candidates ready
676
and willing to endure this work marathon [of long hours] than jobs
677
for them to fill."</i> [p. 71] Thus the labour market is usually a buyers
678
market, and so the sellers have to compromise. In the end, workers
679
adapt to this inequality of power and instead of getting what they
680
want, they want what they get.
681
<p>
682
But under full employment this changes. As we argued in section <a href="secB4.html#secb44">B.4.4</a>
683
and section <a href="secC7.html">C.7</a>, in such a situation it is the bosses who have to
684
start compromising. And they do not like it. As Schor notes, America
685
<i>"has never experienced a sustained period of full employment. The
686
closest we have gotten is the late 1960s, when the overall unemployment
687
rate was under 4 percent for four years. But that experience does
688
more to prove the point than any other example. The trauma caused
689
to business by those years of a tight labour market was considerable.
690
Since then, there has been a powerful consensus that the nation cannot
691
withstand such a low rate of unemployment."</i> [<b>Op. Cit.</b>, pp. 75-76]
692
<p>
693
So, in other words, full employment is not good for the capitalist
694
system due to the power full employment provides workers. Thus
695
unemployment is a necessary requirement for a successful capitalist
696
economy and not some kind of aberration in an otherwise healthy system.
697
Thus "anarcho"-capitalist claims that "pure" capitalism will soon result
698
in permanent full employment are false. Any moves towards full employment
699
will result in a slump as capitalists see their profits squeezed from below
700
by either collective class struggle or by individual mobility in the
701
labour market.
702
<p>
703
This was recognised by Individualist Anarchists like Benjamin Tucker, who
704
argued that mutual banking would <i>"give an unheard of impetus to business,
705
and consequently create an unprecedented demand for labour, -- a demand
706
which would always be in excess of the supply, directly contrary of the
707
present condition of the labour market."</i> [<b>The Anarchist Reader</b>, pp.
708
149-150] In other words, full employment would end capitalist exploitation,
709
drive non-labour income to zero and ensure the worker the full value of
710
her labour -- in other words, end capitalism. Thus, for most (if not all)
711
anarchists the exploitation of labour is only possible when unemployment
712
exists and the supply of labour exceeds the demand for it. Any move
713
towards unemployment will result in a profits squeeze and either the
714
end of capitalism or an economic slump.
715
<p>
716
Indeed, as we argued in the <a href="append1310.html#secf101">last section</a>, the extended periods of
717
(approximately) full employment until the 1960s had the advantage that
718
any profit squeeze could (in the short run anyway) be passed onto working
719
class people in the shape of inflation. As prices rise, labour is made
720
cheaper and profits margins supported. This option is restricted under
721
a "pure" capitalism (for reasons we discussed in the <a href="append1310.html#secf101">last section</a>) and
722
so "pure" capitalism will be affected by full employment faster than
723
"impure" capitalism.
724
<p>
725
As an economy approaches full employment, <i>"hiring new workers suddenly
726
becomes much more difficult. They are harder to find, cost more, and
727
are less experiences. Such shortages are extremely costly for a firm."</i>
728
[Schor, <b>Op. Cit.</b>, p. 75] This encourages a firm to pass on these rises
729
to society in the form of price rises, so creating inflation. Workers,
730
in turn, try to maintain their standard of living. <i>"Every general
731
increase in labour costs in recent years,"</i> note J. Brecher and J.
732
Costello in the late 1970s, <i>"has followed, rather than preceded, an
733
increase in consumer prices. Wage increases have been the result of
734
workers' efforts to catch up after their incomes have already been
735
eroded by inflation. Nor could it easily be otherwise. All a businessman
736
has to do to raise a price . . . [is to] make an announcement. . . Wage
737
rates . . . are primarily determined by contracts"</i> and so cannot be
738
easily adjusted in the short term. [<b>Common Sense for Bad Times</b>,
739
p, 120]
740
<p>
741
These full employment pressures will still exist with "pure" capitalism
742
(and due to the nature of the banking system will not have the safety
743
value of inflation). This means that periodic profit squeezes will occur,
744
due to the nature of a tight labour market and the increased power of
745
workers this generates. This in turn means that a "pure" capitalism will
746
be subject to periods of unemployment (as we argued in section <a href="secC9.html">C.9</a>)
747
and so still have a business cycle. This is usually acknowledged by
748
right-libertarians in passing, although they seem to think that this
749
is purely a "short-term" problem (it seems a strange "short-term"
750
problem that continually occurs).
751
<p>
752
But such an analysis is denied by right-libertarians. For them government
753
action, combined with the habit of many labour unions to obtain higher
754
than market wage rates for their members, creates and exacerbates mass
755
unemployment. This flows from the deductive logic of much capitalist
756
economics. The basic assumption of capitalism is that markets clear. So
757
if unemployment exists then it can only be because the price of labour
758
(wages) is too high (Austrian Economist W. Duncan Reekie argues
759
that unemployment will <i>"disappear provided real wages are not
760
artificially high"</i> [<b>Markets, Entrepreneurs and Liberty</b>, p. 72]).
761
<p>
762
Thus the assumption provokes the conclusion -- unemployment is caused
763
by an unclearing market as markets always clear. And the cause for
764
this is either the state or unions. But what if the labour market
765
<b>cannot</b> clear without seriously damaging the power and profits of
766
capitalists? What if unemployment is required to maximise profits
767
by weakening labours' bargaining position on the market and so
768
maximising the capitalists power? In that case unemployment is
769
caused by capitalism, not by forces external to it.
770
<p>
771
However, let us assume that the right-libertarian theory is correct.
772
Let us assume that unemployment is all the fault of the selfish unions
773
and that a job-seeker <i>"who does not want to wait will always get a job
774
in the unhampered market economy."</i> [von Mises, <b>Human Action</b>, p. 595]
775
<p>
776
Would crushing the unions reduce unemployment? Let us assume that the
777
unions have been crushed and government has been abolished (or, at the
778
very least, become a minimum state). The aim of the capitalist class is
779
to maximise their profits and to do this they invest in labour saving
780
machinery and otherwise attempt to increase productivity. But increasing
781
productivity means that the prices of goods fall and falling prices
782
mean increasing real wages. It is high real wages that, according to
783
right-libertarians, that cause unemployment. So as a reward for increasing
784
productivity, workers will have to have their money wages cut in order
785
to stop unemployment occurring! For this reason some employers might
786
refrain from cutting wages in order to avoid damage to morale - potentially
787
an important concern.
788
<p>
789
Moreover, wage contracts involve <b>time</b> -- a contract will usually agree a
790
certain wage for a certain period. This builds in rigidity into the market,
791
wages cannot be adjusted as quickly as other commodity prices. Of course,
792
it could be argued that reducing the period of the contract and/or allowing
793
the wage to be adjusted could overcome this problem. However, if we reduce
794
the period of the contract then workers are at a suffer disadvantage as they
795
will not know if they have a job tomorrow and so they will not be able to
796
easily plan their future (an evil situation for anyone to be in). Moreover,
797
even without formal contracts, wage renegotiation can be expensive. After all,
798
it takes time to bargain (and time is money under capitalism) and wage
799
cutting can involve the risk of the loss of mutual good will between
800
employer and employee. And would <b>you</b> give your boss the power to
801
"adjust" your wages as he/she thought was necessary? To do so would
802
imply an altruistic trust in others not to abuse their power.
803
<p>
804
Thus a "pure" capitalism would be constantly seeing employment
805
increase and decrease as productivity levels change. There exist
806
important reasons why the labour market need not clear which revolve
807
around the avoidance/delaying of wage cuts by the actions of capitalists
808
themselves. Thus, given a choice between cutting wages for all workers
809
and laying off some workers without cutting the wages of the remaining
810
employees, it is unsurprising that capitalists usually go for the later.
811
After all, the sack is an important disciplining device and firing workers
812
can make the remaining employees more inclined to work harder and be
813
more obedient.
814
<p>
815
And, of course, many employers are not inclined to hire over-qualified
816
workers. This is because, once the economy picks up again, their worker
817
has a tendency to move elsewhere and so it can cost them time and money
818
finding a replacement and training them. This means that involuntary
819
unemployment can easily occur, so reducing tendencies towards full
820
employment even more. In addition, one of the assumptions of the
821
standard marginalist economic model is one of decreasing returns
822
to scale. This means that as employment increases, costs rise and so
823
prices also rise (and so real wages fall). But in reality many industries
824
have <b>increasing</b> returns to scale, which means that as production increases
825
unit costs fall, prices fall and so real wages rise. Thus in such an
826
economy unemployment would increase simply because of the nature of
827
the production process!
828
<p>
829
Moreover, as we argued in-depth in section <a href="secC9.html">C.9</a>, a cut in money wages is
830
not a neutral act. A cut in money wages means a reduction in demand for
831
certain industries, which may have to reduce the wages of its employees
832
(or fire them) to make ends meet. This could produce a accumulative
833
effect and actually <b>increase</b> unemployment rather than reduce it.
834
<p>
835
In addition, there are no "self-correcting" forces at work in the
836
labour market which will quickly bring employment back to full levels.
837
This is for a few reasons. Firstly, the supply of labour cannot be
838
reduced by cutting back production as in other markets. All we can
839
do is move to other areas and hope to find work there. Secondly, the
840
supply of labour can sometimes adjust to wage decreases in the
841
wrong direction. Low wages might drive workers to offer a greater
842
amount of labour (i.e. longer hours) to make up for any short
843
fall (or to keep their job). This is usually termed the <i>"efficiency
844
wage"</i> effect. Similarly, another family member may seek employment
845
in order to maintain a given standard of living. Falling wages may
846
cause the number of workers seeking employment to <b>increase</b>, causing
847
a full further fall in wages and so on (and this is ignoring the
848
effects of lowering wages on demand discussed in section <a href="secC9.html">C.9</a>).
849
<p>
850
The paradox of piece work is an important example of this effect.
851
As Schor argues, <i>"piece-rate workers were caught in a viscous
852
downward spiral of poverty and overwork. . . When rates were
853
low, they found themselves compelled to make up in extra output
854
what they were losing on each piece. But the extra output produced
855
glutted the market and drove rates down further."</i> [Juliet C. Schor,
856
<b>The Overworked American</b>, p, 58]
857
<p>
858
Thus, in the face of reducing wages, the labour market may see an
859
accumulative move away from (rather than towards) full employment,
860
The right-libertarian argument is that unemployment is caused by real
861
wages being too high which in turn flows from the assumption that markets
862
clear. If there is unemployment, then the price of the commodity labour
863
is too high -- otherwise supply and demand would meet and the market
864
clear. But if, as we argued above, unemployment is essential to
865
discipline workers then the labour market <b>cannot</b> clear except for
866
short periods. If the labour market clears, profits are squeezed. Thus
867
the claim that unemployment is caused by "too high" real wages is false
868
(and as we argue in section <a href="secC9.html">C.9</a>, cutting these wages will result in
869
deepening any slump and making recovery longer to come about).
870
<p>
871
In other words, the assumption that the labour market must clear
872
is false, as is any assumption that reducing wages will tend to push
873
the economy quickly back to full employment. The nature of wage labour
874
and the "commodity" being sold (i.e. human labour/time/liberty) ensure
875
that it can never be the same as others. This has important implications
876
for economic theory and the claims of right-libertarians, implications
877
that they fail to see due to their vision of labour as a commodity
878
like any other.
879
<p>
880
The question arises, of course, of whether, during periods of full
881
employment, workers could not take advantage of their market power
882
and gain increased workers' control, create co-operatives and so
883
reform away capitalism. This was the argument of the Mutualist and
884
Individualist anarchists and it does have its merits. However, it
885
is clear (see section <a href="secJ5.html#secj512">J.5.12</a>) that bosses hate to have their authority
886
reduced and so combat workers' control whenever they can. The logic
887
is simple, if workers increase their control within the workplace
888
the manager and bosses may soon be out of a job and (more importantly)
889
they may start to control the allocation of profits. Any increase
890
in working class militancy may provoke capitalists to stop/reduce
891
investment and credit and so create the economic environment (i.e.
892
increasing unemployment) necessary to undercut working class power.
893
<p>
894
In other words, a period of full unemployment is not sufficient to
895
reform capitalism away. Full employment (nevermind any struggle over
896
workers' control) will reduce profits and if profits are reduced
897
then firms find it hard to repay debts, fund investment and provide
898
profits for shareholders. This profits squeeze would be enough to
899
force capitalism into a slump and any attempts at gaining workers'
900
self-management in periods of high employment will help push it
901
over the edge (after all, workers' control without control over the
902
allocation of any surplus is distinctly phoney). Moreover, even if
903
we ignore the effects of full employment may not last due to problems
904
associated with over-investment (see section <a href="secC7.html#secc72">C.7.2</a>), credit and interest
905
rate problems (see section <a href="append1310.html#secf101">10.1</a>) and realisation/aggregate demand
906
disjoints. Full employment adds to the problems associated with the
907
capitalist business cycle and so, if class struggle and workers power
908
did not exist or cost problem, capitalism would still not be stable.
909
<p>
910
If equilibrium is a myth, then so is full employment. It seems somewhat
911
ironic that "anarcho"-capitalists and other right-libertarians
912
maintain that there will be equilibrium (full employment) in the one
913
market within capitalism it can never actually exist in! This is
914
usually quietly acknowledged by most right-libertarians, who mention
915
in passing that some "temporary" unemployment <b>will</b> exist in their
916
system -- but "temporary" unemployment is not full employment. Of course,
917
you could maintain that all unemployment is "voluntary" and get round
918
the problem by denying it, but that will not get us very far.
919
<p>
920
So it is all fine and well saying that "libertarian" capitalism would be
921
based upon the maxim <i>"From each as they choose, to each as they are chosen."</i>
922
[Robert Nozick, <b>Anarchy, State, and Utopia</b>, p. 160] But if the labour
923
market is such that workers have little option about what they "choose"
924
to give and fear that they will <b>not</b> be chosen, then they are at a
925
disadvantage when compared to their bosses and so "consent" to being
926
treated as a resource from the capitalist can make a profit from. And
927
so this will result in any "free" contract on the labour market favouring
928
one party at the expense of the other -- as can be seen from "actually
929
existing capitalism".
930
<p>
931
Thus any "free exchange" on the labour market will usually <b>not</b> reflect
932
the true desires of working people (and who will make all the "adjusting"
933
and end up wanting what they get). Only when the economy is approaching
934
full employment will the labour market start to reflect the true desires
935
of working people and their wage start to approach its full product.
936
And when this happens, profits are squeezed and capitalism goes into
937
slump and the resulting unemployment disciplines the working class and
938
restores profit margins. Thus full employment will be the exception
939
rather than the rule within capitalism (and that is a conclusion which
940
the historical record indicates).
941
<p>
942
In other words, in a normally working capitalist economy any labour
943
contracts will not create relationships based upon freedom due to
944
the inequalities in power between workers and capitalists. Instead,
945
any contracts will be based upon domination, <b>not</b> freedom. Which
946
prompts the question, how is libertarian capitalism <b>libertarian</b> if
947
it erodes the liberty of a large class of people?
948
949
<a name="secf103"><h2>10.3 Was laissez-faire capitalism stable?</h2>
950
951
Firstly, we must state that a pure laissez-faire capitalist system has
952
not existed. This means that any evidence we present in this section
953
can be dismissed by right-libertarians for precisely this fact -- it
954
was not "pure" enough. Of course, if they were consistent, you would
955
expect them to shun all historical and current examples of capitalism
956
or activity within capitalism, but this they do not. The logic is
957
simple -- if X is good, then it is permissible to use it. If X is
958
bad, the system is not pure enough.
959
<p>
960
However, as right-libertarians <b>do</b> use historical examples so shall
961
we. According to Murray Rothbard, there was <i>"quasi-laissez-faire
962
industrialisation [in] the nineteenth century"</i> [<b>The Ethics of Liberty</b>,
963
p. 264] and so we will use the example of nineteenth century America --
964
as this is usually taken as being the closest to pure laissez-faire --
965
in order to see if laissez-faire is stable or not.
966
<p>
967
Yes, we are well aware that 19th century USA was far from laissez-faire
968
so on -- but as this example has been often used by right-Libertarians'
969
themselves (for example, Ayn Rand) we think that we can gain a lot from
970
looking at this imperfect approximation of "pure" capitalism (and as
971
we argued in section <a href="append138.html">8</a>, it is the "quasi" aspects of the system that
972
counted in industrialisation, <b>not</b> the laissez-faire ones).
973
<p>
974
So, was 19th century America stable? No, it most definitely was not.
975
<p>
976
Firstly, throughout that century there were a continual economic booms
977
and slumps. The last third of the 19th century (often considered
978
as a heyday of private enterprise) was a period of profound instability
979
and anxiety. Between 1867 and 1900 there were 8 complete business
980
cycles. Over these 396 months, the economy expanded during 199 months
981
and contracted during 197. Hardly a sign of great stability (since the
982
end of world war II, only about a fifth of the time has spent in periods
983
of recession or depression, by way of comparison). Overall, the
984
economy went into a slump, panic or crisis in 1807, 1817, 1828,
985
1834, 1837, 1854, 1857, 1873, 1882, and 1893 (in addition, 1903
986
and 1907 were also crisis years).
987
<p>
988
Part of this instability came from the eras banking system. <i>"Lack of
989
a central banking system,"</i> writes Richard Du Boff, <i>"until the Federal
990
Reserve act of 1913 made financial panics worse and business cycle
991
swings more severe"</i> [<b>Accumulation and Power</b>, p. 177] It was in
992
response to this instability that the Federal Reserve system was
993
created; and as Doug Henwood notes <i>"the campaign for a more rational
994
system of money and credit was not a movement of Wall Street vs. industry
995
or regional finance, but a broad movement of elite bankers and the
996
managers of the new corporations as well as academics and business
997
journalists. The emergence of the Fed was the culmination of attempts
998
to define a standard of value that began in the 1890s with the emergence
999
of the modern professionally managed corporation owned not by its managers
1000
but dispersed public shareholders."</i> [<b>Wall Street</b>, p. 93] Indeed,
1001
the Bank of England was often forced to act as lender of last resort
1002
to the US, which had no central bank.
1003
<p>
1004
In the decentralised banking system of the 19th century, during panics
1005
thousands of banks would hoard resources, so starving the system for
1006
liquidity precisely at the moment it was most badly needed. The creation
1007
of trusts was one way in which capitalists tried to manage the system's
1008
instabilities (at the expense of consumers) and the corporation was a
1009
response to the outlawing of trusts. <i>"By internalising lots of the
1010
competitive system's gaps -- by bring more transactions within the same
1011
institutional walls -- corporations greatly stabilised the economy."</i>
1012
[Henwood, <b>Op. Cit.</b>, p. 94]
1013
<p>
1014
All during the hey-day of laissez faire we also find popular protests
1015
against the money system used, namely specie (in particular gold), which
1016
was considered as a hindrance to economic activity and expansion (as well
1017
as being a tool for the rich). The Individualist Anarchists, for example,
1018
considered the money monopoly (which included the use of specie as money)
1019
as the means by which capitalists ensured that <i>"the labourers . . . [are]
1020
kept in the condition of wage labourers,"</i> and reduced <i>"to the conditions
1021
of servants; and subject to all such extortions as their employers . . .
1022
may choose to practice upon them"</i>, indeed they became the <i>"mere tools
1023
and machines in the hands of their employers"</i>. With the end of this
1024
monopoly, <i>"[t]he amount of money, capable of being furnished . . .
1025
[would assure that all would] be under no necessity to act as a servant,
1026
or sell his or her labour to others."</i> [Lysander Spooner, <b>A Letter to
1027
Grover Cleveland</b>, p. 47, p. 39, p. 50, p. 41] In other words, a specie
1028
based system (as desired by many "anarcho"-capitalists) was considered
1029
a key way of maintaining wage labour and exploitation.
1030
<p>
1031
Interestingly, since the end of the era of the Gold Standard (and so
1032
commodity money) popular debate, protest and concern about money has
1033
disappeared. The debate and protest was in response to the <b>effects</b> of
1034
commodity money on the economy -- with many people correctly viewing
1035
the seriously restrictive monetary regime of the time responsible for
1036
economic problems and crisis as well as increasing inequalities. Instead
1037
radicals across the political spectrum urged a more flexible regime,
1038
one that did not cause wage slavery and crisis by reducing the amount
1039
of money in circulation when it could be used to expand production and
1040
reduce the impact of slumps. Needless to say, the Federal Reserve system
1041
in the USA was far from the institution these populists wanted (after all,
1042
it is run by and for the elite interests who desired its creation).
1043
<p>
1044
That the laissez-faire system was so volatile and panic-ridden suggests
1045
that "anarcho"-capitalist dreams of privatising everything, including
1046
banking, and everything will be fine are very optimistic at best (and,
1047
ironically, it was members of the capitalist class who lead the movement
1048
towards state-managed capitalism in the name of "sound money").
1049
<p>
1050
</body>
1051
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